sees âformidable headwindsâ for economy, dampening exit expectations
agencies warn about rising public debt in Greece, Portugal and Spain
industrial production likely to have contracted in October
president Weber signals rise in money market rates
More credit rating problems
EUR-USD seems for now to have given up all attempts of
reaching new highs before the end of the year: after the release of the US labour market figures at the end of last week, it
dropped below 1.49 initially; during the course of this week, it slipped below
1.48, and even below 1.47 temporarily.
Although both movements were in favour of the dollar,
each was motivated by quite different factors. The US labour market figures had been better than expected, fuelling
speculation that the Fed could embark on an exit from its quantitative easing
policy earlier. Interest rates and yields had gone up accordingly.
Then Fed chairman Ben Bernanke hastened to dampen
exaggerated euphoria about an impending policy shift. In a speech on Monday, he emphasized that,
despite increased signs of recovery, the US economy was facing âformidable headwindsâ. At least
with a view to the upcoming open market committee meeting on 16 December, he
did not reveal any intention of changing the policy stance.
Mr Bernankeâs warning about âheadwindsâ coincided with
markets focusing increasingly on credit risks. They had not yet fully digested
the debt problems in Dubai, when rating agencies triggered fresh fears: Moodyâs
led the way by making a subtle distinction between the AAA ratings on Canada, Germany or France, termed âresistantâ, and the ratings on the UK and the US,which were only âresilientâ. On Tuesday, it was reported
that Fitch had downgraded its rating on Greece for the second time in the space of less than two
months, from A- to BBB+. S&P put Greece, Portugal and also Spain on negative credit watch.
Credit spreads widened markedly on the rating reports.
The interest rate spread between Bunds and 10-year Greek government bonds, for
example, rose by around 80 basis points to almost 250 basis points. Mounting
crisis fears weighed on the euro at the same time, whereas the dollar and the
yen, both typical funding currencies for carry trades and other more risky
investments, particularly commodities, strengthened.
Data on industrial new orders and production in the
eurozone turned out to be weaker than expected, which was also a drag on the
euro. In Germany, industrial production contracted by
1.8% in October, in France and the Netherlands by 0.8% respectively; Italy was the only country to post a slight increase. Thus growth in Q4 is set to
be much weaker than in the previous quarter. Remarks made by Bundesbank
president Axel Weber on the development of interest rates in the short maturity
segment of the money market, though striking, have not as yet sparked a
significant market reaction. At the press conference, ECB president Jean-Claude
Trichet had said that the measures announced were not intended to lead to a
rise in the overnight rate. According to Mr Weber, as liquidity management
normalises, the Eonia rate could go up gradually. At least he expects the Eonia
rate to remain below the central bank rate in the first quarter.
In line with this notion, the Bundesbankâs latest Financial
Stability Report had pointed out that banksâ bidding behaviour would contribute
to reducing excess liquidity in the money market, even if full allotment at
refinancing operations is maintained. In this case, the overnight rate ought to
converge with the refi rate.
Stephan Rieke +49 69 718-4114.
Grabbe / Klaus NĂ€fken
report has been prepared by BHF-BANK Aktiengesellschaft on behalf of itself and
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